Irvine firm Broadcom launches hostile takeover bid for Emulex

By Alex Pham

April 22, 2009 12 AM PT

Another day, another takeover in the works. But this one’s different: It’s a hostile bid.

Broadcom Corp. launched an unsolicited offer Tuesday to buy nearby networking chip maker Emulex Corp. for $764 million in cash, marking the second major technology deal announced in as many days as cash-rich companies see big discounts in the slumping stock market.

The bid adds to the signs of life the mergers-and-acquisitions market is showing in harsh economic times. On Monday, deals totaling $16 billion were announced. Broadcom’s bid was the only significant one disclosed Tuesday.

The offer of $9.25 a share amounted to a 40% premium over Emulex’s closing price of $6.61 Monday, but Emulex did not express enthusiasm. Instead, the Costa Mesa company’s board said only that it would “review the proposal in due course.”

Most analysts expect Emulex to rebuff the Irvine wireless chip maker’s offer as too low, highlighting a hazard for some companies whose cheap stock prices make them easy targets as mergers and acquisitions start to revive.

Investors wasted no time pushing Emulex shares up $3.09, or 47%, to $9.70 as they anticipated a sweeter offer.

“This environment may be good for buyers, but sellers aren’t going to want to sell low,” said Kurt Kunert, publisher of FactSet Research Systems Inc., a financial information company. “You’re going to see more push-back from sellers who don’t want to be selling at the bottom of the market.”

That’s just what Sun Microsystems Inc. did. Early this month, the Santa Clara, Calif., maker of computer servers and software rejected IBM Corp.’s offer, worth about $7 billion. On Monday, it announced a deal with Oracle Corp. for about $7.4 billion in cash, a 6% premium over IBM’s latest bid.

That same scenario could play out for Emulex as well, analysts said.

“Broadcom’s unsolicited bid could kick off a series of overtures for Emulex,” J.P. Morgan analyst Mark Moskowitz said in a note. “We would expect Emulex to play defense and look for a higher bid.”

Emulex already has played hard to get. It rejected an overture in December from Broadcom, according to Broadcom Chief Executive Scott A. McGregor.

In January, Emulex adopted a “poison pill” that would allow current shareholders to purchase large amounts of Emulex stock at steep discounts should any shareholder accumulate more than 15% of Emulex shares. Such measures are designed to deter unwanted buyers.

McGregor said Tuesday that the two companies, whose headquarters sit seven miles apart in Orange County, would be an ideal match.

Broadcom makes, among other products, chips that connect powerful computers called servers. Emulex designs chips that help those servers connect to large storage disks that contain vast amounts of data.

McGregor said the two companies could develop a single chip that would perform both tasks. Broadcom was built on its ability to combine an increasing number of tasks on one chip.

In addition, the two companies could share sales and distribution costs because they sell to many of the same customers, including Sun Micro, IBM, Hewlett-Packard Co., EMC Corp. and Dell Inc.

“We see Emulex as a good business,” McGregor said. “It’s certainly one that would give us greater combined value.”

He said Broadcom’s offer was “priced to be a no-brainer for Emulex shareholders.”

But Wall Street pushed up Emulex shares to 45 cents above Broadcom’s offer.

“Basically, investors are telling Broadcom, ‘If you want to marry me, you’re going to have to come up with a bigger diamond ring,’ ” said David Wu, analyst with Global Crown Capital.

Rajesh Ghai, vice president of ThinkEquity Partners, predicted Emulex would have no trouble wrangling a higher price.

“Emulex shares were trading at all-time lows, so it’s very cheap,” said Ghai, who estimated that Emulex has a 33% market share in the $800-million market for adapters that allow computer servers to talk with data storage devices. QLogic Corp. in Aliso Viejo controls about 56% of the market, and its shares surged $2.21, or 19%, to $14.12, on speculation that it too would become an acquisition target.

“It’s a duopoly where the margins remain strong, and the barriers to entry are high,” Ghai said.

Broadcom shares dropped $1.27, or 5.8%, to $20.52. It had reported a first-quarter loss of $92 million, or 19 cents a share, contrasted with a profit of $74.3 million, or 14 cents a share, for last year’s quarter. Revenue fell 17% to $853.4 million from $1 billion a year earlier. It had nearly $2 billion in cash and short-term investments at the end of March and said it would use those funds to finance its purchase of Emulex.

alex.pham@latimes.com

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Companies at a glance

BROADCOM CORP.

Headquarters: Irvine

Founded: 1991

Chief executive: Scott A. McGregor

Employees: 7,185

Business: Semiconductors

2008 revenue: $4.7 billion

EMULEX CORP.

Headquarters: Costa Mesa